More evidence that the real estate market is rigged

“Right now the dominating force driving the rental market in California is foreclosed-upon former homeowners transitioning to renters,” Burke said. “That demographic is an important market segment for us.”

Fixing up dilapidated foreclosures “is the home building of the current decade,” Burke said. “In the 2000s, people were building houses everywhere. The home building of today is taking an old rundown house that hasn’t been cared for and bringing it up to current standards and modernizing it.”

Despite its millions of dollars worth of investments, Praxis is small compared with the Wall Street-backed giants who have plunged into the distressed residential real estate market. Oakland’s Waypoint Real Estate Investment Group, for instance, hopes to pour $1 billion into single-family homes over the next couple of years. It owns hundreds of homes in eastern Contra Costa County and Oakland, as well as markets outside the Bay Area.

It’s since been joined by other private-equity backed heavyweights, including Blackstone Group, Colony Capital, Och-Ziff and American Homes 4 Rent.

Many of those big players are focusing on cheaper markets than the Bay Area, such as Arizona, Nevada and Florida. Likewise many mom-and-pop investors have shied away from buying locally.

‘Unlikely to last’

“California doesn’t have large cash flow; it’s more of an appreciation play,” said Kathy Fettke, CEO of Real Wealth Network, a Walnut Creek real-estate investment club. Her club usually steers members to lower-cost markets, but recently recommended buying California homes between $150,000 and $300,000.

“This is the first time we’re featuring California,” Fettke said. “We now have a combination of low home prices and low interest rates, which makes for better cash flow than we’ve ever seen.”

But it’s unlikely to last. “In the last six months, prices have gone up as much as 20 percent in certain neighborhoods,” she said.

“Investor activity eventually will taper off,” LePage said. “Prices will get to the point where it doesn’t pencil. That’s inevitable – but the big question is when. You have to know when the economy will gain a lot more traction.”

This does not mean you should give up but you have to increase your knowledge and find other ways to buy that will not compete with hedge funds.